Everybody knows about the property ladder. Scrape your pennies together to buy a house and get on the bottom rung of the ladder. Eventually use the equity from your first house to move up the ladder until you’re able to (hopefully) afford to buy the house of your dreams.
The other week, I had the opportunity to talk to the Toronto Star about Matt’s and my experience with the mortgage on our first house. As I was preparing for the interview, it occurred to me that the lessons we learned might be interesting to some of you too.
Our first house got us onto the property ladder. It set us up to buy the farm and begin building our forever house. However, in order to go from our starter house to the farm, we had to skip a few rungs along the climb.
We were able to move up the property ladder quickly because when Matt and I sold our first house, we owned it free and clear. We had no mortgage.
For two 30-year-olds to pay off their first house in four and a half years is a bit unusual.
We didn’t win the lottery, no relative left us a big inheritance, we work regular jobs and earn average salaries, and our parents didn’t give us money to purchase either our first house or the farm.
So how did we pay off our mortgage early?
First, we bought a house we could afford. When we went to the bank to be pre-approved for our mortgage, we were astounded by how much we qualified to borrow. It was close to twice the amount we were expecting to spend. It’s easy to be sucked into spending more than you planned, especially if the bank says that you can. Be disciplined and stick to your budget.
The other thing that we did at the very start was to put down the biggest down payment we could. For Matt and me that was 25%. The hardest part of buying a house for many young first time buyers is building up their savings to make the down payment.
Fortunately, Matt and I were able to live with our parents and pay little or no rent. We saved and economized, and when we were ready to buy the house, we had enough (in my case just enough) to put 25% down. Making the largest down payment you can at the beginning puts you much further ahead in paying off your mortgage over the long term.
The biggest thing that helped us to pay off our mortgage in four and a half years was taking advantage of the accelerated payment plans our bank allowed. To start, we chose a “weekly rapid” plan where we made a payment every single Friday for a total of 52 payments a year. The amount of the payment was determined by taking what we would have paid monthly, dividing it by four and then paying that amount each week. This works out to basically making 13 months of payments rather than 12.
I remember sitting in the bank going over the payment options with the mortgage advisor and her showing us that by making just one extra month of payments a year, we would pay off our 25 year mortgage in 21 years. That was an easy choice for us.
However, 21 years wasn’t fast enough.
The other option we took advantage of was to make lump sum payments directly against the principal of our mortgage. For our bank, the maximum they allowed was 15% per year. Every single year, Matt and I took full advantage of this, and every single year we knocked roughly another 5 years off our mortgage.
I’m not saying it was easy to see that much money going out of my bank account each year, but getting a printout showing our mortgage would be done in 15, 8, and then 3 years did soften the sting.
The Amortization Period line at the bottom is the one to keep your eye on.
Most banks will also allow you to increase the the amount of your weekly (or biweekly or monthly) payments. We did eventually bump up our weekly installments, but for the most part we focused on saving for the annual lump sum payments.
With any financial situation, I think it’s really important to watch your numbers and understand exactly where your money is going. We requested extra statements from the bank that showed the breakdown of exactly how much of our weekly payments went towards principal and how much was interest. When the ratio finally crossed 50-50 with even just a few more dollars going towards principal than interest, that was cause for celebration. We also kept an eye on the amortization period that changed every time we made a lump sum payment and carefully read our annual statements.
It will likely take a few years, but eventually you will pay more principal than interest.
Because we know our numbers, we know that we paid just over $20,000 in interest on our mortgage. This is versus nearly $200,000 in interest we would have paid if we stuck with the bank’s schedule and taken the full 25 years to pay off our mortgage.
Despite Matt’s and my focus on our mortgage, we did try to keep a balance in our life. Prioritizing our mortgage was important to us, but having a life was too. In the time that we owned our first house, we got married (and paid for our wedding), traveled, furnished our house and renovated. If we had put all of our money towards only our mortgage, I don’t think we would have enjoyed our house in the same way we were able to.
So here are my five tips for how we paid off our mortgage in less than five years:
- Buy the house you can afford.
- Put as much down as you can.
- Take advantage of accelerated and lump sum payment plans.
- Watch your numbers.
- Prioritize what’s important to you.
Now at the farm, we have a mortgage again, and it’s much bigger than it was on our first house. However, it’s still affordable for us. We’ve again chosen an accelerated payment plan of 13 months of payments per year. And we’re already planning on making a lump sum payment before the end of the year. (Note, lump sum payments are usually calendar year, not mortgage year, so even though we’ve only owned the farm for 8 months, we can still make a payment against the principal).
Our first house put us on the property ladder, and the strong financial foundation we built by paying off our mortgage early allowed us to quickly move up the ladder.
We won’t pay the farm off in five years like we did at our first house, but we’re not satisfied to wait the full term of our mortgage either.
Now it’s your turn. Do you have a mortgage? What’s your approach to payments? Any tips to share?